Abstract
The influence of liquidity on return on assets has been subject of much research in recent years, from the point of view of individual assets as well as considering the liquidity of the market as a whole. This study aims to evaluate the influence of change in liquidity in the pricing of assets. The measures of liquidity consisted of variations in the quantity of securities, in the number of trades and in financial volume, as well as these variables weighted by the Bovespa index and also the same variables lagged. The sample is made up of the shares traded in the São Paulo Stock Exchange. Monthly data were collected for the period of January 2000 through June 2008. The results show that return on assets is positively influenced by the Bovespa index and by variations in liquidity. In general, it is the companies with the lower liquidity levels that show the highest positive variations of their own liquidity, therefore, having higher returns.
Highlights
The influence of liquidity on the return on assets has been widely researched in recent years
Pastor and Stambaugh (2003) measure liquidity based on the principle that the flow of orders leads to a major reversal of returns when liquidity is low and find that expected returns increase with the liquidity’s beta, which is a measure of sensitivity to innovations in market liquidity
The results show that expected illiquidity has a positive and significant effect on the expected excess return, i.e., the expected excess return of an asset, besides the risk premium, represents a premium of the share’s illiquidity
Summary
The influence of liquidity on the return on assets has been widely researched in recent years. Pastor and Stambaugh (2003) measure liquidity based on the principle that the flow of orders leads to a major reversal of returns when liquidity is low and find that expected returns increase with the liquidity’s beta, which is a measure of sensitivity to innovations in market liquidity. These results are interpreted by the authors as evidence that systematic liquidity risk is priced. Several authors (CHORDIA, ROLL and SUBRAHMANYAM, 2001, PASTOR and STAMBAUGH, 2003, PORTER, 2003) find that the liquidity risk premium remains even after controlling for factors such as market risk (beta), size and book-to-market
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